Should JPMorgan be able to deduct its $5.1 billion settlement?

JPMorgan Chase & Co.'s Manhattan headquarters.

Inspired by the multi-billion settlements currently being negotiated between federal regulators and JPMorgan Chase, there is a campaign afoot on Capital Hill to block big companies from being able to take a tax deduction when they settle cases with the government. JPMorgan has agreed to pay a $5.1 billion settlement over mortgage securities -- all of which is apparently tax deductible, and could save the country's largest bank an estimated $1.5 billion in taxes.

The U.S. Public Interest Research Group has a petition drive to stop the deductions, and two House Democrats have proposed a law. But Allan Sloan, senior editor-at-large at Fortune Magazine is having none of this. He says in the case of JPMorgan owing $5.1 billion to Fannie Mae and Freddie Mac, there's a big difference between a settlement-tax deduction and a fine, which is something else. 

"There was a business dispute between Fannie and Freddie and JP, JP settled the business dispute for $5.1 billion -- it is the classic definition of a business expense," Sloan says.

Sloan points out that the settlement negotiated between Fannie and Freddie and JPMorgan was not punitive in the eyes of the law -- unlike a fine, which is not deductible from taxes.

Sloan says that allowing JPMorgan to take a deduction on the settlement is still a win for American taxpayers because of where the money will end up.

"It's going to end up in the Treasury," Sloan explains. "It's going to taxpayers, because of the way Fannie and Freddie work, every extra $5.1 billion that wanders in the door wanders out the door fairly soon to the Treasury. So, we taxpayers are getting all $5 billion. JPMorgan is getting to deduct $5 billion, but it's still out of pocket 65 percent of $5 billion, and it's a lot worse off than it was, and we taxpayers are better off than we were."

About the author

Allan Sloan is a senior editor-at-large for Fortune magazine.
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Mr. Sloan's contention that because the settlement money is going to end up in the Treasury we shouldn't worry about the tax revenue losses is laughable. Fanny and Freddie are sending their money to the Treasury for a simple reason: the Treasury gave them lots of money to cover the losses incurred because of banks like JPMorgan's actions. So now, out of the $5.1B that should be helping to make Fanny and Freddy (and by extension, the Treasury) whole, the Treasury loses several Billion dollars in revenue.
Furthermore, what if this were a settlement between two non-governmental businesses? The Treasury would lose tax revenues and would not be receiving the settlement money.
Finally, I find it absolutely appalling that Mr. Sloan can refer to settling fraudulent sales of mortgage backed securities as "a classic definition of a business expense" with a straight face. When settling fraud cases becomes a "classic business expense" our businessmen need to go acquire some ethics.

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